Facts

The court was required to determine preliminary issues relating to the grant of new business tenancies by the defendant local authority landlord (L) to the claimant tenants (T).

T leased stalls, shops and offices at an indoor market from L. The leases were originally upon terms which included rent plus a service charge, but were later changed to include a rent which covered all operating and maintenance costs, pending various building works. L leased offices on the market land to commercial tenants, and also received income from a car park on the market land. L and T had agreed that new business tenancies would be granted on terms to be determined by the court under the Landlord and Tenant Act 1954 s.35, but disagreed over two main issues. Those issues were whether (i) T were entitled to reduced rents to account for income L received from parts of the market used for non-market purposes, including from the car park and the commercial rental income; (ii) the rent should continue to be all-inclusive or should be exclusive with T's contribution to services covered by a separate, variable service charge.

Held

(1) L was obliged by the Metropolitan Meat and Poultry Market Act 1860 s.9 to use its income from letting the commercial offices, after deducting expenses, to support the maintenance and operations of the market. However, there was no provision in T's leases that the rent or service charge money that they paid to L had to be treated as funds to be spent directly on market purposes, nor was there a statutory limitation in the 1860 Act, as modified by the City of London (Various Powers) Act 1963, on the amount which L could charge T. L, as the market authority, was entitled to seek to make a profit, recover its costs or minimise its losses, R. v City of London Corp Ex p. Brewster [1993] E.G. 207 (C.S.) considered. It was therefore open to L to use the money from letting the commercial premises and the car park to meet part of its costs of maintaining and operating the market, and to pay the equivalent sums received as rent or service charges from T into its general funds to use in other ways. There was no limitation in the 1860 Act as to which market purposes the income should be spent on: it was open to L to choose to spend it on market purposes which were unrelated to the direct provision of services to T under the new tenancies. There was no reason why s.8 and s.9 of the 1860 Act would cause a lower rent to be agreed by landlords and tenants for the purposes of setting rent under s.34 of the 1954 Act (see paras 69-74 of judgment). (2) Pursuant to O'May v City of London Real Property Co Ltd [1983] 2 A.C. 726, the court should not generally exercise its discretion under s.35 of the 1954 Act to change the basic parameters of a commercial arrangement between a landlord and tenant. However, L had shown that there were good and sufficient reasons to justify a change in the payment structure under T's tenancies back to the original structure of a rent and variable service charge. The weight to be attached to the existing payment structure was considerably diminished because there had been a continuing dispute about the structure of the payment terms since the 1980s. The parties agreed that L should recover in full from T the ongoing operational and maintenance costs of running the market, and that was most fairly and accurately achieved by a variable service charge. T's proposal for an all-inclusive rent would create an unwarranted and avoidable risk that L would not be able to recover those costs. There was therefore a good reason, based on essential fairness, for the payment terms to include a variable service charge, O'May and Hyams v Titan Properties (1972) 24 P. & C.R. 359 followed. The majority of the running costs L incurred were directly referable to T carrying on their businesses, and therefore it was fair that they should directly bear the risks of fluctuations in those costs. Whilst there was force in the argument that L should bear the risk of unforeseen upward fluctuation in the cost of maintaining the fabric of the building, including significant unexpected structural costs, T's position as long-term occupants of the market meant that there was less reason than in other cases to distinguish between L and T's respective interests in maintaining the fabric of the buildings. The balance of justice and fairness was clearly in favour of a separate service charge (paras 80, 82-83, 86-87, 91, 94, 98).

Preliminary issues determined in favour of defendant.

Comment

Tenants of an indoor market operated by a local authority were not entitled to have their rents under new business tenancies reduced to account for income that the local authority received from parts of the market used for other purposes. It was fair for the tenants to pay a separate, variable service charge to ensure that the local authority could recover in full the ongoing operational and maintenance costs of running the market.